Dow Chemical Up 5.6% on Earnings Beat, Dividend Hike

By Johanna Bennett

It’s an ugly morning for U.S. stocks. But Dow Chemical (DOW) is offering a rare bit of good news. Exceptional news actually, being that the Dow component not only reported fourth-quarter earnings that solidly beat expectations, but also unveiled a 15% dividend hike and plans to raise its stock repurchase plans to $4.5 billion.

Flat-to-rising y-o-y EBITDA margins were logged in every segment explaining much of the earnings beat, in our view. Margin expansion was particularly pronounced within the Performance Plastics segment where EBITDA margins expanded by 755bps y-o-y … Company-wide EBITDA margins expanded by 307bps y-o-y. Volume gains were noteworthy within the Agricultural Sciences (+15%) and Coatings and Infrastructure (+11%) segments. Improving global ethylene fundamentals and better results at Dow Corning resulted in impressive y-o-y equity affiliate income growth…We would expect the market to react positively to this earnings beat and believe DOW shares are attractively valued with substantial earnings and valuation upside.

Dow has been under pressure from activist investor Daniel Loebto split its petrochemicals businesses from its specialty chemicals businesses. The chemical company cut costs by more than $500 million last year, and in December outlined a plan to exit some low-margin chemical businesses to increase its focus on specialty chemicals used in industrial processes.

According to Alembic’s Ahmed, selling its “laggard” businesses could fetch as much as $3.6 billion that Dow could use to further reduce debt or return to shareholders. He writes:

We believe dividend yield support kicks in at around USD30 per share suggesting little downside from the current share price. That said our conservative sum-of-the parts valuation analysis that bakes in the medium-to-long term earnings upside at the company suggests that Dow Chemical shares could more than double from current levels – highlighting the favorable risk/return opportunity.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.